Clinton Acts to Change Levy That Affects Middle Class

By DAVID CAY JOHNSTON

Published: January 21, 2000

President Clinton yesterday moved to change a tax that is intended to make sure that all wealthy Americans pay some income taxes but that has also become a fast-growing burden on the middle class, particularly families with children.

The tax, known as the alternative minimum tax, was enacted in 1969 after it was disclosed that some families with incomes of more than $200,000 were paying no income taxes. It aimed to force wealthy Americans who were avoiding taxes through tax shelters to pay at least something to the government.

But in doing so Congress decided to treat exemptions for children and deductions for medical expenses and state and local taxes just like special tax breaks allowed for investments in tax shelters like oil wells and real estate. When those deductions reach specific amounts set by Congress, at which the taxpayer typically owes little or no tax, the alternative minimum tax kicks in and the taxpayer must pay it.

So, for example, a single mother with children making less than $28,000 can be stuck with a bigger tax bill.

The president's proposal would guarantee that starting this year exemptions for all but two children can be claimed and every child can be claimed by 2010 without setting off the alternative minimum tax. Taxpayers would also be guaranteed the standard deduction, which was $7,200 last year for a couple filing jointly.

The problem of middle-class Americans owing a tax intended for the wealthy was identified in an article in The New York Times last year. The article described David and Margaret Klaassen, a Kansas couple with 13 children who owed money under the alternative minimum tax.

Reached yesterday, Mr. Klaassen called the president's proposal excellent. But Mr. Klaassen, whose family would not have owed the tax if it had had six or fewer children, said that the president's proposal did not go far enough.

Indeed, families could still owe the tax just because they took deductions for the expense of treating costly illnesses. The Klaassens owed the alternative minimum tax in 1997 when a son battling cancer ran up big medical bills.

The president's proposal would also not help families that owe the tax because of factors like deductions for high state and local taxes, credits for foreign taxes and losses from running a farm.

The president's proposal prompted a renewed call by Republicans in Congress to repeal the tax. A repeal would save wealthy Americans billions of dollars.

''The president's proposal is only half the loaf,'' said Representative Bill Archer, Republican of Texas, who is chairman of the House Ways and Means Committee, and who wants repeal of what he called ''this tax- hike time bomb'' that will apply to an estimated nine million taxpayers by 2009. Mr. Archer noted that last month Val Oveson, the I.R.S. taxpayer advocate, urged repeal of the alternative minimum tax to simplify the tax system.

In 1997, the latest year for which data is available, about 618,000 individuals and couples paid the tax, 29 percent more than in 1996. The tax raised more than $4 billion, a 42 percent increase.

The president's plan would cost the government $32.8 billion in revenue over the next 10 years. Mr. Archer's proposal would cost about $105 billion over the same period, with much of the savings going to the wealthiest 5 percent of Americans.

Jon Talisman, the acting assistant Treasury secretary for tax policy, described the proposal as ''a down payment on correcting the serious defects'' with the tax.

Mr. Talisman said his office ''looked at other scenarios and how many people would be left on the A.M.T. and we thought this was the most important'' problem to solve. He also noted that large families in any state can be affected, while high state and local taxes push people into the alternative minimum tax only in certain states.

The president's proposal requires the approval of Congress to become law. If it is enacted, the number of people who are paid $30,000 to $75,000 who are subject to the alternative minimum tax would fall nearly by half in 2002 and by more than 80 percent in 2010, a Treasury analysis showed, while among those making more than $200,000 the decline would be just 2 percent in 2002 and 13 percent in 2010.